We need Reforms 2.0

The exposure of a series of high profile scandals in recent weeks is the clearest reminder yet that Indian governance has fallen so far behind the Indian economy that there is a serious risk that it will extinguish prospects of the nation’s development. It will also undermine India’s geopolitical influence.

A growing India therefore faces a faster-growing governance gap, causing our problems to scale faster than the attempted solutions. This is so because the first generation economic reforms — launched by the P V Narasimha Rao government and extended by the Atal Behari Vajpayee government — have run their course. All the low-hanging fruit have been picked. The nearly double-digit economic growth that we are experiencing today are the rewards of good policies of the previous decade. Unless India acts now to liberalise its economy, we will be punished for the follies of the current, wasted decade.

Ahead of Barack Obama’s trip last month, Lawrence Summers, a senior White House economic advisor, praised India’s people-centric, consumption-driven model as the “Mumbai consensus”, worthy of emulation. Yet much of the Indian economy is captured in a Delhi straitjacket. At a time when rising wages in China is opening up opportunities in the manufacturing sector in other lower-wage countries, India’s labour market remains as inflexible as it was. At a time when funds are flowing into emerging economies, the Indian government could channel it into “good” investment by opening up more sectors to foreign direct investment. These are historic opportunities. But neither the UPA government nor the opposition BJP show any interest in exploiting them.

Today few even remember the phrase “second generation reforms”. These were eagerly awaited in 2004, when Dr Manmohan Singh became prime minister. The political establishment now appears to be in thrall of the UPA government’s economics of entitlement — subsidies and wasteful expenditure on a gargantuan scale. As Niranjan Rajadhyaksha, managing editor of Mint, notes “government expenditure has likely overshot its budgeted level by at least Rs 1.13 trillion so far this fiscal. This is more than the Rs 1 trillion the government collected from the wildly successful auction of spectrum for 3G telecom services. It was a windfall that the government has frittered away, a fact that has been buried under the avalanche of reports on various scams. The money raised through the 3G auctions should ideally have been spent on national projects that would provide long-term benefits, be it linking our rivers, funding new schools or promoting green communities, to give a few examples. It has unfortunately been used to oil the political gravy train.”

Another astute observer of Indian politics, Shekhar Gupta of the Indian Express, points out that “(over) the past few years, almost all scandals have involved misuse…of discretionary powers by the government, either for old-fashioned rent-seeking, or its new child, crony-capitalism.” But while there is a natural and necessary clamour for punishing corrupt politicians and government officials, public discourse fails to get down to the root of the matter — that unless the Delhi straitjacket is dismantled, corruption scandals will recur.

That is why Reform 2.0 — minimum government, maximum governance — is necessary. Property rights, labour regulations, investment regulations, education, agriculture and domestic trade must be liberalised. There is case for placing the management and allocation of national resources like minerals, hydrocarbons and radio spectrum under independent agencies. The damage to the independence and credibility of institutions under the UPA government has been immense. This has to be reversed. If the list of areas in need of urgent reform is long it is because they have been pending for over a decade now.

For geopolitical clout too
Despite the global economic crisis and the eastward shift of the world’s geopolitical centre of gravity, external environment is favourably disposed towards us. Save a few exceptions, almost every country in the world — big and small — sees India’s emergence in positive light. This was palpable in the overwhelming support India received for its bid for a non-permanent seat at the UN Security Council. The countries that voted for India didn’t do so because they subscribe to India’s values or are admirers of our civilisational culture and democratic traditions. It happened because they see potential benefits for themselves in India’s growth process.

Indeed, it is undeniable that post-1991 economic growth is the real basis of India’s foreign policy achievements in the years since. More reforms, for instance, will give New Delhi better leverage with Pakistan’s international sponsors. More reforms will allow India to reduce the relative differences in national power vis-a-vis China. Whether it is in East Asia or at the G-20, India’s geopolitical influence depends on its economic performance — not merely in headline GDP growth rates, but in the quality of that growth.

India is on the verge of a virtuous cycle wherein the external environment creates opportunities for internal development, and this in turn shapes world affairs in our favour. Without Reform 2.0, this cycle could easily stop, or worse, go into reverse.